Q.Why do firms revalue assets and reassess their liabilities on retirement or on the event of death of a partner?

When a partner retires or dies, the firm undergoes a change in its profit-sharing structure. The continuing partners take over the retiring partner’s share of goodwill, assets, and liabilities. Revaluation at this point ensures that the retiring partner receives their fair, current share of the firm’s net worth — not the outdated book values.

Assets like land or machinery may have appreciated or depreciated since purchase. Similarly, liabilities such as outstanding expenses may be understated or overstated. If the firm does not revalue, the retiring partner would be paid based on old figures, which could be unfair to either side. Revaluation brings all items to their realisable or current values, so the settlement is accurate and equitable.

The process also updates the books for the continuing partners. Any gain or loss on revaluation is transferred to the old partners’ capital accounts in their old profit-sharing ratio. This adjustment is recorded through a Revaluation Account (also called Profit & Loss Adjustment Account). …

Why Revaluation is Necessary on Retirement or Death

When a partner retires or dies, the partnership is effectively dissolved for that partner. The continuing partners will carry on the business, but the outgoing partner (or the legal heirs) must be paid their final claim — which is their capital account balance plus their share of any accumulated profits or losses that have not yet been recorded in the books.

Over time, assets like land, buildings, or investments may have appreciated in market value, while liabilities may have been over- or under-stated. The book values (as per the Balance Sheet) often do not reflect current realisable values. If the firm simply paid the retiring partner based on outdated book values, the retiring partner would lose their rightful share of the hidden gains, or the continuing partners would unfairly bear a hidden loss.

The Revaluation Account (also called Profit & Loss Adjustment Account) is the tool used to capture these changes. It records:

• Increases in asset values (credit side — a gain)
• Decreases in asset values (debit side — a loss)
• Increases in liabilities (debit side — a loss)
• Decreases in liabilities (credit side — a gain)

The net balance of the Revaluation Account (profit or loss) is then transferred to the old partners’ capital accounts in their old profit-sharing ratio. This ensures that the retiring partner gets their exact share of the revaluation gain or loss, and the continuing partners’ capital accounts are adjusted accordingly before the new ratio takes effect.

The Accounting Treatment — Step by Step

1. Open a Revaluation Account — debit all decreases in asset values and increases in liabilities; credit all increases in asset values and decreases in liabilities.
2. Pass journal entries for each revalued item — for example, if land appreciates, debit Land A/c and credit Revaluation A/c.
3. Close the Revaluation Account — if it shows a profit (credit balance), transfer it to the old partners’ capital accounts in the old ratio (Dr. Revaluation A/c, Cr. Partners’ Capital A/cs). If a loss, reverse the entry.
4. Adjust the retiring partner’s capital account — after revaluation profit/loss is added, the retiring partner’s capital account shows their final dues. This amount is then settled (paid or transferred to a loan account).
5. The continuing partners then adjust their capital accounts in the new ratio (if required by the partnership deed).

Example to Illustrate

Suppose A, B, and C are partners sharing profits in the ratio of 5:3:2. B retires. On the date of retirement, the firm’s Balance Sheet shows Land at ₹2,00,000 (book value), but its current market value is ₹3,00,000. There is also an unrecorded liability of ₹20,000 for outstanding expenses.

Journal Entry for Revaluation:

Revaluation Account:

| Particulars | Amount (₹) | Particulars | Amount (₹) |

|-------------|------------|-------------|------------| …